How to find the best fixed rate Isa

A CASH Isa lets you build up a savings pot for holidays, big purchases or even just emergencies without worrying about money going to the taxman.

Here is how to find the best fixed rate Isa to boost your savings.

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What is a Cash Isa?

Each tax year, everyone over the age of 16 in the UK gets an Isa (Individual Savings Account) allowance, which lets them save cash tax-free.

This means they can earn interest on their savings in a bank, building society or other financial provider, without any tax deducted.

Savings kept in an Isa will continue to earn interest tax-free until the money is withdrawn from the account.

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The maximum amount you can put away for the 2021/22 tax year is £20,000.

There are a few different tax-free savings and investment products to choose from and a Cash Isa is one of them.

What is a fixed rate Isa?

A fixed rate Isa is a cash savings product that pays you a set return for a specific length of time.

Terms range from one to seven years and the rates are higher the longer you lock your money away for.

The interest earned in a fixed rate Isa is tax-free

What’s the difference between a cash ISA and fixed rate Isa?

A fixed rate Isa is a type of Cash Isa.

Other types of Cash Isa include easy-access accounts that let you make withdrawals at any time without any penalties, or notice accounts that let you access your money without penalties after a certain number of days.

How does a fixed rate Isa work?

You can open a fixed rate Isa with a bank or building society.

There may be a minimum deposit that you usually have to make within 14 days, and your money will earn a fixed rate of interest tax-free over the deal period.

For example, if you put £5,000 into a one-year fixed rate Isa with a rate of 2% you would earn £100 of interest tax-free.

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There may be limits on withdrawals or charges during the fixed period so only lock away the money if you can afford to do so.

The rate will usually drop at the end of the fixed term so keep an eye on the interest rate you are earning and see if it is worth transferring to a better Isa deal.

What is AER?

AER stands for annual equivalent rate.

It is the technical term for the interest rate you will get on your savings and is a good way to compare the best fixed rate Isas against each other.

The AER tells you how much interest you will earn in a year assuming you don’t make any withdrawals.

What are the best fixed rate cash Isas?

Cash Isa rates change all the time.

The best cash Isa rate for you will depend on the flexibility you want and how long you want to put your money away for.

The best rates often require you to keep your money in the account for longer.

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Providers may allow withdrawals during the fixed rate term, but you could lose interest paid on the amount you are taking out.

Don’t just rely on the fixed rate Isa being offered by your current account provider or high street bank.

Some of the best fixed rate cash Isa deals may be offered by challenger banks, smaller building societies or online-only lenders.

What is a Cash Isa fixed rate bond?

Fixed rate Cash Isas are sometimes marketed as bonds but really they are different products.

A bond is another type of savings product that typically allows higher deposits than a cash Isa, but the interest isn’t tax free.

Your money is also locked away for a set term, but rules on withdrawing money from bonds are more strict and there can be high fees for early access.

Can I add money to a fixed rate Isa?

You can put up to £20,000 each tax-year in a fixed rate Isa.

There may be a minimum deposit to open an account such as £1,000.

You don’t have to put all £20,000 in at once and most people won’t have that much to save.

One option is to open your account and add money from your bank account via direct debit each month.

You can keep adding funds throughout the tax year as long as you don’t go over the £20,000 limit.

Some providers may also let your transfer old Isa money into an account.

This doesn’t count towards your £20,0000 limit, so you could move Isa money from previous tax years to a product paying better interest.

Are fixed rate Isas a good idea?

An Isa can help you try to beat inflation and boosts your savings if you are putting money away for a big event such as a mortgage deposit, new car or your summer holiday.

You can usually get higher returns by locking your money away with the best fixed rate Isa rates

For many years, Isas were the number one option for savers as you can shelter your hard-earned cash away from the hands of the taxman.

But all that changed in April 2016 when the government introduced a big shake-up to something called the Personal Savings Allowance (PSA).

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Under the scheme, basic rate taxpayers can now earn £1,000 in interest a year tax-free – in whatever account they’re saving in.

While if you’re a higher-rate taxpayer you earn up to £500 tax-free.

At the time, the government estimated the change meant the vast majority – around 95% of adults – now no longer pay any tax on their savings.

With savings rates at record lows, you would need a lot of money and a high rate of interest to earn more than £1,000 a year.

This may make an Isa appear less useful.

For example, if you found an easy access rate to match inflation of 0.4%, you would need to save up to around £255,000 before earning £1,000 of interest to go beyond the PSA.

An ISA can still be effective though, especially for high earners.

A higher rate taxpayer would go beyond the PSA once they have saved more than £125,000 in the same savings account.

There is nothing to stop you using both the PSA and an ISA, especially if you have a large lump sum you want to earn interest on.

Additionally, rates can change all the time and may increase so having your money in an account that never charges tax could be more effective in the long run.

Is a fixed rate bond better than an ISA?

It is worth comparing the interest offered on a fixed rate bond with a cash Isa.

You can often put more than the £20,000 Isa allowance into a savings bond but the interest earned won’t be tax-free.

Additionally, there will be penalties if you want to access your money before the end of your term and some may not let you make withdrawals at all.

You could also have both products, especially if you have used up your £20,000 Isa allowance and still want to save money elsewhere.

Who has the best fixed rate isa?

The best fixed rate Isa will vary among providers.

A lender may offer the best 1 year fixed rate Isa but could be uncompetitive for longer term deals.

You can compare fixed rate Isas on a comparison website to find the best deals based on the interest rate and term.

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Decent rates can disappear quickly once they become popular as providers may have a limit on how many customers they want – so you may have to act fast.

You can keep an eye on the market by setting up alerts with comparison websites.

If I open and pay into an Isa in the current tax year, and then the rate drops, can I move it?

You can only contribute new Isa money into one cash Isa during a single tax year.

That can be annoying if you open an account and the rate drops or you find a better deal elsewhere.

However, you are still able to switch but you will have to move all the money you have contributed and close the old account.

What happens to a cash Isa if the holder has passed away?

A cash Isa is a form of savings, so when someone dies it will be part of their estate.

There may be inheritance tax to pay if the value of the Isa or the whole estate is above the nil-rate threshold, currently £325,000.

However, as with other assets, an Isa can be passed to a spouse or civil partner without any inheritance tax to pay.

This money is given as a one-off additional Isa allowance so it retains its tax-free status.

Should I use my ISA allowance for cash or stocks and shares?

You can use your Isa allowance as you wish, so you could put all £20,000 into one type of tax-free account or spread it across both cash and stocks and shares.

A cash Isa will give you a fixed rate of return so you know what you will get back at the end of the deal.

In contrast, you could earn more by investing in the stock market with a stocks and shares Isa, but there is more risk as you could also lose money.

There are often fees to manage a stocks and shares Isa, while a cash Isa is typically free.

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It also depends on what you are doing with the money and when you need to access it.

If you need the funds in the next year or two then a cash Isa is more flexible and accessible, but if you are using a stocks and shares Isa you should really be invested for three years at least so you can overcome any losses and maximise your returns.

You could use a cash Isa for short term savings, such as if you want a car in the next year or so and stocks and shares for more long-term goals.

Can I swap between Cash Isa, Stock and Shares, and Innovative Finance?

You can spread as much of your allowance as you like within the £20,000 limit each tax year, in a Cash Isa from age 16 and a Stocks and Shares Isa from age 18.

Or you can back peer-to-peer loans through an Innovative Finance Isa.

Transfers are also allowed between the products, so you can move old Isa money in a Cash Isa into stocks and shares.

Check with your provider though, as while all Cash Isa providers must allow transfers out, they don’t have to always accept transfers coming in.

 

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Transferring between the same type of account such as a Cash Isa should take no more than 15 days, but it could be 30 days if moving to a different type such as a Stocks & Shares Isa.

It’s a bit more tricky if you want to move new Isa money that you have deposited in the same tax year.

You would have to transfer all the money that you contributed and close your account.

Some providers may offer flexible Isas.

This means you can make withdrawals and the sum taken won’t lose its tax-free status as long as you put the same amount back during the tax year.

For example, if you put £15,000 into a cash Isa and then withdrew £5,000 during the same tax year, that money will stay as part of your allowance. So, you could top it up to £10,000 and still be within the £20,000 limit, as long as the money is replaced before the tax year ends.

Not all Isas have a flexible option so you will need to check with your provider.

However, moving Isa money from previous tax years doesn’t count towards the allowance so you don’t have to transfer the whole amount and can keep old accounts open.

There is also a Lifetime Isa that lets anyone age 18 to 39 save money and earn a government bonus, that can be put towards a house deposit or your retirement savings.

These products all fall under the same annual Isa allowance.

What are the advantages of fixed rate Isas?

Fixed rate Isas give you a guaranteed rate of return that you can earn tax free.

There are no fees involved unlike some other savings accounts or a Stocks and Shares Isa.

Additionally, you can start a Cash Isa two years before a Stocks & Shares product at age 16, giving you an extra two years of tax-free savings.

There is even a Junior Isa version that your parents could open in your name and contribute towards from when you are a baby.

What are the disadvantages of fixed rate Isas?

A guaranteed return can help plan your finances, but you will need to be prepared to lock up your money for a few years if you want the best fixed rate Isa.

The top returns are usually on five-year terms, so you could be missing out even if you have the best 1 year fixed rate Isa.

However, there is a risk if you sign up to the best rate for a long-term but then interest rates rise and better products come out.

This would make your Isa less competitive.

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Some will let you make withdrawals, but you could also face penalties if you want to get your money out earlier.

This usually means losing the interest paid on the amount you are withdrawing.

Cash Isas in general aren’t that competitive, especially with the Bank of England base rate – used by banks to price products – at record lows.

So even the best 3 year fixed rate Isa may not beat inflation and it could be worth considering other savings products or a Stocks & Shares Isa to boost your returns.

Which fixed rate Isa should I choose?

Getting the best rate is important but consider when you will need the money.

If you can wait a few years, it may be worth using a five-year fixed rate cash Isa which tend to offer higher rates.

However, if you have more short-term savings goals you could instead opt for the best one year or two year fixed rate Isa.

Check you can afford the minimum deposit so you don’t miss out on the tax-free interest and be aware of any penalties for withdrawals if you do need to access your cash.

When to choose a fixed rate Isa

Many providers will release new rates in the final months of the tax year around February and March.

This period is known as Isa season and is a bit of a marketing ploy to get savers to use their allowance.

You can open an Isa at any point during the tax year so it is worth keeping an eye out all your round.

How to find the best fixed rate Isa

Isas are offered by a range of providers.

You should choose based on the rate but also how long you are happy to put your money away for as well as if you want the flexibility to make withdrawals.

Your current account provider may offer an Isa. This may be convenient as it will be easy to set up, but it is important to shop around as high street banks rarely offer the best fixed rate Isas.

Compare fixed rate Isas using a comparison website which will let you search by term, rate and the type of access you want.

What are the alternatives to fixed rate Isa?

A fixed rate Isa is just one type of tax-free savings product.

You can also put your allowance towards a different type of Cash Isa, such as an easy access account or invest with a Stocks and Shares or Innovative Finance Isa.

There is also a Lifetime Isa that lets anyone age 18 to 39 save money and earn a government bonus that can be put towards a house deposit or your retirement savings.

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These products all fall under the same annual Isa allowance.

Separately, parents can save money tax-free for their children using a Junior Isa, which has a cash and stocks and shares version.

The Junior Isa allowance is separate to the main Isa allowance and is currently £9,000.

Beyond Isas, you could put money in a standard savings account or bond.

The government backed National Savings & Investments also offers Premium Bonds.

These don’t pay interest but you can save up to £50,000 and each £1 you put in Premium Bonds is an entry into a monthly draw with tax-free cash prizes of up to £1 million.

How many fixed rate Isas can I have?

Your Isa is split into new contributions and transfers from older products opened in previous tax periods.

There is new money that you can contribute each year up to your £20,000 allowance, plus you can also transfer money sitting in old Isas from previous years.

Any new money can only be contributed into one type of each Isa account in a single tax year.

This means you can only open and contribute to one cash Isa, one stocks and shares Isa and one Lifetime and Innovative Finance Isa during the 2021/22 tax year.

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A fixed rate Isa counts as a cash Isa, so you wouldn’t be able to open another type of this product in the same year – such as an easy access product.

You can still keep Isa money in old accounts from previous years, so you could have several different old Cash Isa accounts and one new one each tax year that you make contributions into.

Additionally, you can transfer old Isa money to a newly opened product on top of your new contributions. It may be worth doing this if the interest rate is better and if your older deal has been cut.

Isa transfers are treated separately to new money as it is funds that have already been used under your allowance.

You can often move some or all of your old Isa money.

Not all providers will allow transfers so check with your provider.

Isa transfers can also be made with newly contributed money during the same tax year, but you would have to move all your funds and close your account.

For example, if you start a Cash Isa in 2021/22 but then find a better deal, you would need to transfer all the money and close the Cash Isa so you can use your allowance somewhere else.

Can I combine older ISAs into one?

Old Isa money can be transferred to a new account without affecting your allowance.

This can be a good way of consolidating your old Isa pots to manage your money in one place.

However, check if you are getting more interest on a new product otherwise it may be better just keeping your older Isas where they are.

Is my money safe in a fixed rate Cash Isa?

Firms providing financial products such as Isas must be regulated by the Financial Conduct Authority (FCA).

This means they must follow rules on treating customers fairly and making product terms clear.

You can check a firm is regulated on the FCA register.

There is a risk that your Isa provider could go bust, but regulated firms are backed by the Financial Services Compensation Scheme.

This protects up to £85,000 of your cash if your Isa provider goes under.

How do early access penalties work?

Many fixed rate Cash Isa providers will allow withdrawals but there will usually be penalties for early access.

This will be detailed in your product terms but typically means losing interest earned on the amount you are withdrawing.

The money taken out will also lose its tax-free status.